Financial Instruments: Measurement and Recognition Flashcards
How do you initially recognise a financial asset?
FV including transaction costs except when through P/L
What are the three main measurement categories for financial assets and what’s typically included in them?
Amortised cost - loans, receivables, bonds
FVTPL - most shares
FV through OCI - shares if irrevocable election
How are financial liabilities measured?
Amortised cost
FVTPL
What are the three stages of impairment of financial assets?
- Recognise an allowance at the same time as debt (12m of expected credit loss) {Dr P/L, Cr Allowance}
- Review debts. If healthy, check 12m loss. If unhealthy allowance becomes lifetime expected credit losses. {Dr P/L, Cr allowance}
- Evidence debt is bad and write off {Dr P/L, Cr Allowance, Cr Loan}
What is the criteria for hedge accounting?
- Eligible hedging Instruments and eligible hedged items
- At inception, there is formal designation and documentation of hedging relationship and entity’s risk management objective
- Meets all of the hedge effectiveness requirements
How do you initially recognise a financial liability?
FV
How would you account for an interest free loan to employees?
FV: measure at PV at the market interest rate
Dr Loan (discounted value)
Dr Finance costs
Cr Cash Paid
What is the contractual cashflow test?
The contractual terms of the financial asset give rise on specified dates, to cashflows that are solely payments of principal and interest
What is the business model test?
The business intends to hold the assets in order to collect contractual cashflows as opposed to selling the asset
What is the effectiveness criteria?
- credit risk does not dominate the relationship
- hedge ratio of items and instrument is the same
- economic relationship between item and instrument
What is the aim of hedging?
Reduce volatility
If you cannot hedge account, how do you account for it?
Through a speculative derivative
What is the Dr and Cr for a $5,000 gain for speculative trading?
FVTPL
Dr Financial asset
Cr P/L
What is the Dr and Cr for a $5,000 loss for speculative trading?
FVTPL
Dr P/L
Cr Financial liability
What is the Dr and Cr for a $5,000 gain used for physical delivery?
Part of normal trading - do nothing.
Recognise at purchase or sale.
IF YOU ARE GOING TO USE IN NORMAL COURSE OF BUSINESS
What is the Dr and Cr for a $5,000 gain for a FV hedge?
Protecting value fo the item. Recognised asset or liability.
Hedging Instrument:
Dr Financial Asset
Cr P/L
Hedged Item:
Break normal a/c rules and Revalue to P/L
What is the Dr and Cr for a $5,000 gain for cashflow hedging? (Ineffective Loss is of $4,900)
Protecting a future cashflow (e.g. supply price of coffee)
Dr Financial Asset $5,000
Cr OCI $4,900 (effective)
Cr P/L $100 (ineffective)
What are the characteristics of a derivative?
- little or no investment
- derives value from some underlying item
- settled at a future date
How are derivatives accounted for?
Fair value through profit or loss
When a financial asset is derecognised, how is it accounted for? (When valued as FV through OCI)
Gains and losses recognised in OCI are reclassified to P/L
When does a financial asset qualify for derecognition?
- once the entity has transferred the contractual rights to receive the cashflows
- retained the contractual rights but has an unavoidable obligation to pass on the cashflows to a third party
The substance of the disposal needs to consider what?
Risks and rewards of ownership
How is a financial guarantee contract subsequently measured?
At the higher of:
- the amount of the loss allowance (IFRS 9)
- the amount initially recognised less the cumulative amount of income (IFRS 15)
